Case T22

KP Brady Ch

JE Stewart M
DJ Trowse M

No. 2 Board of Review

Judgment date: 1 May 1986.

K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)

The question for decision in this reference, which concerns the year of income ended 30 June 1982, is whether the taxpayer, a self-employed person who carried on business as a lawnmowing and garden maintenance contractor, is entitled to a deduction of $5,484 pursuant to the provisions of the Income Tax Assessment Act 1936. The claim for deduction was concerned with the

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taxpayer's liabilities that arose out of an accident that occurred while using his motor vehicle.

2. The Commissioner disallowed the taxpayer's claim, also the objection lodged against the disallowance. The matter has come before this Board for a review of the Commissioner's decision on the objection.

3. At the hearing the taxpayer was represented by his tax agent. The taxpayer gave evidence under oath. The Commissioner was represented by one of his officers. No evidence was called on behalf of the Commissioner.

4. In the year in issue the taxpayer owned a Holden panel van and trailer. The panel van was used to transport the taxpayer, together with tools and some implements, from his home to his first lawnmowing job each morning and thereafter, throughout the day, from job to job until the end of his working day. The trailer, which was towed by the panel van, was used to transport mowers and edging tools used on the jobs and any grass clippings that might have been collected from the various jobs. It seems that, in the year in issue, the taxpayer had some 90 clients whom he serviced on a monthly basis.

5. The taxpayer informed us that he worked irregular hours, depending on the number of jobs that he had to undertake on a particular day. However, it seems that it was not uncommon for him to cease work, as the occasion demanded, at about 5.00 p.m. The taxpayer also informed us that it was his usual custom at the finish of the last job on any day to proceed directly to a particular service station (where he had arranged credit facilities) to refuel his panel van, if necessary, and to refuel his lawnmowers and obtain spare parts for the mowers, as required. This practice enabled him to carry out at his home any repairs to his equipment that might be required, and to proceed directly from his home next morning to the first job to be undertaken that day.

6. On the day of the accident that gave rise to the claims in issue, the taxpayer finished his last job at about 5.00 p.m. In accordance with his usual practice, he proceeded to drive in his panel van, together with his trailer and equipment, directly from the job to the service station referred to for the purpose of obtaining fuel. The course followed by the taxpayer took him in a westerly direction from the job and not in an easterly direction towards his home. When proceeding along a particular highway en route he sought to overtake a parked semitrailer on the kerb-side lane. However, on proceeding around the semitrailer, he was dazzled by the sun's rays which caused him to collide with the rear of the vehicle next in front of him, which in turn, collided with the rear of the vehicle next in front of it. Serious damage was sustained by both vehicles as a result of the collisions.

7. The taxpayer advised us that, at the scene of the accident, he exchanged the usual details concerning names and addresses and registration numbers, etc., with the drivers of the damaged vehicles. It seems that, at the time, he was under the impression, subsequently proved to be incorrect, that he had an insurance cover against any liabilities that might arise in connection with claims for damages that might be made by the drivers of the damaged vehicles. It appears that, because of this impression, and apparently in the view that he was liable for damages because in the circumstances of the accident his vehicle had been the direct cause of the damages sustained by the other vehicles, the taxpayer advised the drivers of those vehicles that he would accept responsibility for payment of the expenses to be incurred (and to be quantified) in repairing the vehicles.

8. The police were not called to the scene of the accident, nor did they attend there. However, the taxpayer advised us that he reported the accident to the police later that day or shortly thereafter. No prosecution nor any other action was taken by the police in connection with the accident. It seems, however, that the drivers of the damaged vehicles reported the accident for insurance purposes.

9. In a communication to the taxpayer dated 5 January 1982, a State Government Insurance Office advised the taxpayer that ``according to the information supplied to us, it appears that you were responsible for this accident. Failing any evidence to the contrary, we intend to claim from you the costs involved [in repairing one of the damaged vehicles] when the final figure is known''. At or about the same time, the taxpayer sought legal assistance in connection with the State Government Insurance Office's communication; also, it seems, in connection with a further claim for

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damages in respect of the other damaged vehicle that was expected to be forthcoming in the then near future from an insurance company (Z insurance company).

10. In a ``without prejudice'' letter dated 23 March 1982, the taxpayer's legal representatives advised the Government Insurance Office, inter alia, that the taxpayer was prepared to offer a sum of money in settlement of the claim made in the amount in settlement of the claim made in the amount of $2,019. However, it appears that the taxpayer, subsequent to that date, personally undertook settlement negotiations with the Government Insurance Office, which led to his making a payment to it of $1,500 on 29 June 1982, and a further final payment of $200 to it on or about 23 July 1982. In a letter to the taxpayer dated 23 July 1982, the Government Insurance Office confirmed that the total payment of $1,700 fully satisfied its original demand for payment of the amount of $2,019.

11. However, the question remains as to the time at which agreement was reached between the parties that payment of the $1,700 would be accepted in full satisfaction of the claim for payment of the amount of $2,019. The taxpayer could not recall whether he had signed an ``Admission of Debt'' form (sometimes used, it seems, by the Government Insurance Office to establish the existence of a liability to pay for damages) or, if he did, the date on which he had signed the form. The form, if it existed, was not in evidence before us. However, the taxpayer appeared to recall having made a telephone call to an officer of the Insurance Office handling his case at or about the time he paid the amount of $1,500 on 29 June 1982, which had the practical effect of ensuring that, providing the taxpayer paid the additional amount of $200 within the next week or so, the Insurance Office would accept the total payment of $1,700 as fully satisfying its claims.

12. The taxpayer impressed us as a witness of truth. We accept, on the balance of probabilities, that the phone call referred to took place in fact and that it related to an agreement between the parties which had been reached on or before 29 June 1982, for payment of the amount of $1,700 in satisfaction of the outstanding claims. We see the phone call as simply giving rise to a further agreement that the payment of the balance of $200 could be deferred for the short period indicated. There was no evidence, or an inference to be properly drawn from the evidence, to support the proposition (as seemed to be suggested by the Commissioner's representative) that no agreement had been reached before 30 June 1982, for payment of the settled sum of $1,700 in lieu of the original claim in the amount of $2,019.

13. We turn now to consider the taxpayer's position in respect of the claim for damages made by the Z insurance company. It appears in this instance that the taxpayer was advised by the company some time shortly after the accident that he was liable for the payment of various expenses incurred, or to be incurred, in repairing the other (or second) damaged vehicle. In a ``without prejudice'' letter dated 21 May 1982, the taxpayer was advised, through his legal advisers, that the total repair costs amounted to $3,682 but that the company was prepared to forgo legal action against him if he could substantiate to the company's satisfaction that he was unable to repay that amount by way of a lump sum amount. In a further ``without prejudice'' letter dated 18 June 1982, again through his legal advisers, the taxpayer was advised that the then repair costs amounted to $3,729 but that the company would be prepared to accept a lump sum payment of $3,250 in satisfaction of the liability. The company advised, in the alternative, that it would be prepared to accept a deposit of $350 with a monthly repayment of $100 until the full amount of $3,729 was paid.

14. In a letter dated 2 July 1982, addressed to the taxpayer personally, the company acknowledged his letter dated 30 June 1982 (not in evidence), and advised that it would accept his offer to pay $3,000 (it seems in a lump sum) in full and final settlement of its claim against him in the amount of $3,729. In a further letter dated 21 July 1982, again addressed to the taxpayer personally, the company referred to an earlier discussion concerning payment and enclosed an ``Admission of Debt'' form for the taxpayer's completion and return to it by 30 July 1982. The company also requested the taxpayer to make a first payment by that date and to make payments each subsequent fortnight thereafter.

15. It appears that the taxpayer made a payment of $229 on or about 24 July 1982. From the ``Admission of Debt'' form signed by the taxpayer on 29 July 1982 (and tendered in

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evidence), it appears that the amount of $229 was regarded by the parties as the initial deposit and that the taxpayer was required to pay instalments of $50 each fortnight thereafter until the full debt of $3,729 had been extinguished. From the evidence, particularly the company's letter dated 2 July 1982, and the taxpayer's letter dated 30 June 1982, referred to in the company's letter, it is apparent, in our opinion, that negotiations concerning payment were still being undertaken in July 1982, which did not reach finality until late in that month on the signing of the ``Admission of Debt'' by the taxpayer, or shortly before that time. In the circumstances, it could not be said, in our opinion, that the amount of the taxpayer's liability had been finally established before that time, which, it will be observed, was after the end of the year of income in issue.

16. We complete our factual narrative by turning to the legal expenses of $55 incurred by the taxpayer. In a note of costs enclosed with a letter dated 19 July 1982, the taxpayer's legal representatives advised him of various actions that had been undertaken on his behalf in connection with the insurance claims and that their costs amounted to $55. There was no evidence before us to suggest that those costs had been advised to the taxpayer before that time or, apart from a general awareness that legal expenses had been incurred which would be quantified and advised to him in due course, that any other specified amount had been advised to him as being payable before that time or before the end of the year in issue.

17. In his return of income for the year in issue, i.e. the year ended 30 June 1982, the taxpayer made claims as follows:

      State Government Insurance Office    1,700
      Z insurance office                   3,729
      Solicitors' fees                        55
      Total:                              $5,484

It will be observed that the Goverment Insurance Office claim was limited to the negotiated amount of $1,700 in lieu of the original liability of $2,019 and that the two remaining claims were in respect of the total liability finally established in each case.

18. It appeared to be common ground between the parties that the taxpayer's claims fall to be considered under what is frequently referred to as the second limb of sec. 51(1) of the Act. This provision provides that all losses and outgoings of a taxpayer to the extent to which they are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income shall be allowable deductions except to the extent to which they might be denied deduction by virtue of the exclusory words of that section. There can be little doubt, in our opinion, that the taxpayer was not an employee and was a self-employed person in the year in issue, who carried on a ``business'' as defined (sec. 6) as a lawnmowing and garden maintenance contractor. In the circumstances, we only find it necessary to consider the second limb of sec. 51(1) as indicated, without considering directly the somewhat narrower provisions of what is often referred to as the first limb of that section.

19. The taxpayer's case appeared to be based upon the general proposition that the accident, which gave rise to the expenses in issue, took place in the ordinary course of the taxpayer's business activities and that, therefore, they were outgoings or losses of a deductible nature. In support of this general proposition, it was contended that the expenses had been ``incurred'', within the meaning of that word as judicially interpreted, at the time of the accident or, failing that, at some later time but before the end of the year of income in issue. It was also contended that the expenses were not of a capital, private or domestic nature because they arose directly out of business activities and were not in any way associated with short or long term benefits accruing to the taxpayer or with culpable negligence or a wrongful act on his part which might be, in different circumstances, attributable to him as a motorist.

20. Broadly speaking, the case for the Commissioner that the expenses were not deductible was put on the bases, first, that the expenses did not arise out of the taxpayer's business activities, secondly, that they were not ``incurred'' (sec. 51(1)) in the income year in issue, and thirdly, that the expenses were properly to be regarded as private in nature because they arose out of acts of the taxpayer which were directly related to him in his capacity as a private motorist on a public road.

21. Having regard to the evidence which we have traversed in considerable detail, it is an inescapable conclusion, in our opinion, that, at

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the time of the accident, the taxpayer was not pursuing some private affair but was, in fact, undertaking activities concerned with refuelling his vehicle and lawnmowers, which, in the words of the courts, was ``part and parcel'' of his normal business operations. Like many other employees of businesses and self-employed persons, in the course of carrying out their official duties and business operations, the taxpayer was using a public highway for business purposes. He had not on the day of the accident finished his normal duties at the scene of his last job, but was proceeding in his usual businesslike way to undertake the business activities already mentioned.

22. We would regard the accident in the circumstances described as being a normal business hazard which, at any time during the taxpayer's working day, could give rise to expenses of the kind here in issue. We do not regard those expenses as being in the nature of a court-imposed penalty because of the taxpayer's failure to be appropriately insured or because, in the circumstances of the accident, the vehicle driven by him was the immediate cause of damage to the other vehicles which, in turn, gave rise to the expenses in issue. In the circumstances, we are of the opinion that the expenses were ``incidental and relevant'' to gaining or producing the taxpayer's assessable income and that they were ``clearly appropriate and adopted for'' that purpose
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47), with the consequence that, to the extent to which they were ``incurred'' in the year in issue, they fall within the ambit of the second limb of sec. 51(1). The expenses were clearly not, in our opinion, outgoings of a capital, private or domestic nature which could be denied deduction under the exclusory words of that section.

23. The meaning of the word ``incurred'' in sec. 51(1) has been the subject of judicial consideration in a number of cases. A liability to pay expenses will be a loss or outgoing ``incurred'' for the purposes of sec. 51(1) although it remains unpaid, provided the taxpayer is ``definitely committed'' or has ``completely subjected'' himself to the liability (see
F.C. of T. v. James Flood Pty. Ltd. (1953) 88 C.L.R. 492 at p. 507). ``...`Incurred' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon... But it does not include a loss or expenditure which is no more than impending, threatened, or expected.''
New Zealand Flax Investments Ltd. v. F.C. of T. (1938) 61 C.L.R. 179 at p. 207, per Dixon J. (as he then was); F.C. of T. v. James Flood Pty. Ltd. (supra) at p. 507.) This is so ``... no matter how certain it is in the year of income that that loss or expenditure will occur in the future''
Nilsen Development Laboratories Pty. Ltd. & Ors v. F.C. of T. 81 ATC 4031 at p. 4035, per Barwick C.J.).

24. In the circumstances of the present case, we are of the opinion that the liability for payment of $1,700 to the State Government Insurance Office was, to the extent of $1,500, actually ``defrayed'' or ``discharged'' by the taxpayer in the year of income in issue. In relation to the balance of $200, it was, we consider, more than ``threatened'' or ``expected'' and was ``encountered'' or ``fallen upon'' by the taxpayer in that year. In the result, in our view, the total amount of $1,700 was ``incurred'' and, therefore, deductible in terms of sec. 51(1).

25. However, we do not think that the same position applies to the several amounts paid to the Z insurance company and solicitors. On the evidence, it is clear, in our opinion, that negotiations with the insurance company concerning the claim for damages continued after 30 June 1982, with the consequence that, in the year in issue, that taxpayer was not ``definitely committed'' to or ``completely subjected'' to a liability for payment of the amount of $3,729, or of any other amount in that year. At that time, a liability was no more than ``threatened'', with the consequence that, no matter how certain the taxpayer might have been that expenditure of the order of $3,729 might be necessary in the future if the negotiations were unsuccessful, it was not ``incurred'' in the judicial sense for the purposes of sec. 51(1). The taxpayer's claim in this matter must therefore fail.

26. In so far as the solicitors' fees are concerned, the evidence indicates that no debt for fees had become payable in the year in issue. Therefore, although the taxpayer no doubt anticipated in that year that fees would be payable in the future, it could not be said on the authorities that a liability in respect of them had been ``incurred'' in that year for the purposes

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of sec. 51(1). The taxpayer's claim in this matter must, therefore, also fail.

27. For the above reasons, we would allow the taxpayer's objection in respect of his claim for a deduction of the amount of $1,700 paid to the State Government Insurance Office and would disallow his objection in respect of his claims concerning payment of $3,729 and $55 to the Z insurance company and solicitors respectively. We would order that the Commissioner amend the assessment in issue to give effect to this decision.

Claims allowed in part

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